We have to keep remembering that CPI is not what the Fed follows

Outlook

Not realistic are hopes that Fed chief Powell will let a cat out of the bag at a bank conference today in Amsterdam. 

Tomorrow’s CPI still rules the roost and has all but paralyzed traders. We have to keep remembering that CPI is not what the Fed follows. The preferred Fed version is PCE, which last came in at 2.7%, up from 2.5% the month before and far from the 2% target.

Former Fed analyst Sahm wisely points out that tomorrow’s CPI is an estimate and the Fed’s search for confidence in the data is critical.  “The United States is a $28 trillion economy with over 160 million workers and over 6 million employer firms. It’s incredibly diverse and dynamic. It should come as no surprise that the statistics we pour over at 8:30 am, while informative, are imprecise.

“ …  The CPI survey collects about 94,000 prices and 8,000 rental housing unit quotes each month. That’s a lot, but it’s a tiny fraction of the prices in the US, and a sample causes variability in the estimates. The Bureau of Labor Statistics provides estimates of the truth, not the truth. Using a sample creates statistical uncertainty, but a sample is the only way to get a timely read on inflation with a reasonable budget and respondent burden.

“Imprecise does not mean fake. It means we must handle the estimates with care. Unfortunately, in the hyper-data-driven world, that’s the opposite of the ritual on CPI Day. For example, last month, the percent change in core CPI in March came in at 0.4%, not the consensus of 0.3%; that was the third month with a higher-than-expected print. Treasury yields shot up immediately, and markets pushed out bets on the timing of the Fed’s first rate cut.

“How big was that miss on consensus? That core reading in March was 0.36%, so it's about 0.01 percentage point of rounding down to 0.3%; the same was true of the 0.36% in February. It’s more than a ‘so close’ moment. The difference of a basis point is not different, at least statistically.

“The standard error of an estimate, such as of monthly inflation, captures the imprecision of the data due to survey sampling. According to the BLS, with a high (90%) degree of confidence, we can say that the true increase in core CPI in March was between 0.29% and 0.43%.”

The point: those who overreact to the data are fools, but they may become richer fools than you and I if they guess right. This is gambling, not good economics or good system trading. Sigh.

Finally, the latest Reuters survey has a majority of economists seeing two Fed rate cuts this year, starting with Sept.

“Nearly two-thirds of economists surveyed, 70 of 108, predicted the first reduction in the fed funds rate in September, to a 5.00%-5.25% range. Those results, from the May 7-13 poll, compared with just over half expecting a September cut when they were surveyed last month. Only 11 forecast a July cut and none said June, compared to 26 and four in the April survey.”

Forecast: The market seriously wants to see either disinflation or a fat drop in growth or both, allowing the forecast to stay with the Sept rate cut. We don’t see how the numbers can be much of an improvement, if any, and there is a real chance we go back to ”no  cut/hike maybe.” Sticky inflation, or stickier than expected, is a dollar tailwind, if the yields reflect it. We will stay consolidative and rangey until CPI arrives tomorrow. We don’t see how there can be much improvement, if any.

Intervention saga

Talk of FX intervention is fading so now attention turns to the probability of a rate hike, solely to bolster the yen. Another question is what will the MoF/BoJ do about the massive amount of equities they have bought, now that the Japanese stock market is recovering? What these speculations point to is a lasting interest in whether a government can overcome manifest destiny (the yield differential) with tricks and half measures.

Reasons for the Fed to cut rates

Avoid embarrassment from getting inflation wrong twice.

Normalize the yield curve.

Head off any recessionary tendencies.

Help housing via mortgage rates.

Help banks rollover commercial property loans.

Help the stock market.

Synchronize with the ECB (and Riksbank and SNB).

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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